CORNING INCORPORATED ORGANIZATION OF INFORMATION
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") provides a historical and prospective narrative on the
Company's financial condition and results of operations. This interim MD&A
should be read in conjunction with the MD&A in Corning's 2020 Form 10-K. The
various sections of this MD&A contain forward-looking statements that involve
risks and uncertainties. Words such as "anticipates," "expects," "intends,"
"plans," "goals," "believes," "seeks," "estimates," "continues," "may," "will,"
"should," and variations of such words and similar expressions are intended to
identify such forward-looking statements. In addition, any statements that refer
to projections of the Company's future financial performance, anticipated growth
and trends in the businesses, uncertain events or assumptions, and other
characterizations of future events or circumstances are forward-looking
statements. Such statements are based on current expectations and could be
affected by the uncertainties and risk factors described throughout this filing
and particularly in "Risk Factors" in Part I, Item 1A of Corning's 2020 Form
10-K, and as may be updated in the Forms 10-Q. Actual results may differ
materially, and these forward-looking statements do not reflect the potential
impact of any divestitures, mergers, acquisitions, or other business
combinations that had not been completed as of March 31, 2021 .
MD&A includes the following sections:
? Overview ? Results of Operations ? Core Performance Measures ? Reportable Segments
? Capital Resources and Liquidity
? Critical Accounting Estimates
? Environment ? Forward-Looking Statements OVERVIEW In response to the COVID-19 pandemic and the ensuing economic uncertainty, including changing market conditions, the Company has and will continue to focus on three core priorities: preserving the financial health of the Company; protecting employees and communities; and delivering on customer commitments. We will continue to build a stronger, more resilient company that is committed to rewarding shareholders and supporting all global stakeholders. While 2020 brought unprecedented challenges to our end markets and operations, driven by the COVID-19 pandemic, economic uncertainty, and social unrest,Corning adapted rapidly and remained resilient. We executed well to preserve financial strength, while advancing major innovations with industry leaders. We effectively applied our focused and cohesive portfolio to create value and outperform our underlying markets, contributing to growth in the second half of 2020 and the first quarter of 2021. Building on the success of the Capital Allocation Framework, we announced our Strategy & Growth Framework, highlighting significant opportunities to sell moreCorning content through each of our Market-Access Platforms. Under this new Framework, our leadership priorities and our fundamental approach to capital allocation remain the same. We continue to focus our portfolio and utilize our financial strength. We expect to generate strong operating cash flow as we move forward. We will continue to use our cash to grow, extend our leadership, and reward shareholders. © 2021Corning Incorporated . All Rights Reserved. 28
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Table of Contents
Summary of results for the three months ended
In the first quarter, net sales were$3,290 million , compared to$2,391 million during the same period in 2020, a net increase of$899 million , or 38%, driven by higher sales in all segments. In the first quarter of 2021,Corning generated net income of$599 million , or$0.67 per diluted share, compared to a net loss of$96 million , or$0.16 per diluted share, for the same period in 2020. The increase in net income of$695 million and diluted earnings per share of$0.83 , was primarily driven by the following items (amounts presented after-tax):
? Higher segment net income of
and cost control; net income increases by segment were
million,
Technologies,
Technologies, Life Sciences and "All Other", respectively; ? The absence of restructuring, impairment and other charges and credits of
higher than prior year gains;
The absence of a negative impact of a cumulative adjustment recorded during
? the first quarter of 2020 to reduce revenue in the amount of
and
? Higher translation gains of
The translation impact of fluctuations in foreign currency exchange rates, including the impact of hedges realized in the current quarter, did not have a material impact onCorning's consolidated net income in the three months endedMarch 31, 2021 , when compared to the same period in 2020. 2021 Corporate Outlook
We expect another quarter of year-over-year sales growth, with approximately
© 2021 Corning Incorporated . All Rights Reserved.
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Table of Contents RESULTS OF OPERATIONS
Selected highlights from operations are as follows (in millions):
Three months ended %
March 31, change
2021 2020 21 vs. 20
Net sales $ 3,290 $ 2,391 38 %
Gross margin $ 1,156 $ 561 106 %
(gross margin %) 35 % 23 %
Selling, general and administrative expenses
1 %
(as a % of net sales) 12 % 17 %
Research, development and engineering expenses$ 222 $ 261 (15 %) (as a % of net sales) 7 % 11 %
Translated earnings contract gain, net
300 %
(as a % of net sales) 8 % 3 %
Income (loss) before income taxes$ 825 $ (108 ) * (as a % of net sales) 25 %
(5 %)
(Provision) benefit for income taxes$ (226 ) $ 12 * (as a % of net sales) (7 %)
1 %
Net income (loss) attributable toCorning Incorporated$ 599 $ (96 ) * (as a % of net sales) 18 % (4 %) * Not meaningful © 2021 Corning Incorporated. All Rights Reserved. 30
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Table of Contents SegmentNet Sales The following table presents segment net sales by reportable segment and All Other (in millions): Three months ended % March 31, change 2021 2020 21 vs. 20 Display Technologies$ 863 $ 751 15 % Optical Communications 937 791 18 % Specialty Materials 451 352 28 % Environmental Technologies 441 320 38 % Life Sciences 300 258 16 % All Other (1) 271 57 375 % Net sales of reportable segments and All Other 3,263 2,529 29 % Impact of foreign currency movements (2) 27 (33 ) * Cumulative adjustment related to customer contract (3) (105 ) * Consolidated net sales$ 3,290 $ 2,391 38 %
(1) The Company obtained a controlling interest in HSG during the third quarter
of 2020 and has consolidated results in "All Other" as of
in the Display Technologies segment.
(3) Amount represents the negative impact of a cumulative adjustment recorded
during the first quarter of 2020 to reduce revenue in the amount of
million. The adjustment was associated with a previously recorded commercial
benefit asset, reflected as a prepayment, to a customer with a long-term
supply agreement that substantially exited its production of LCD panels.
* Not meaningful
In the first quarter, net sales of reportable segments were
? Display Technologies' net sales increased by
to volume growth in the mid-teens in percentage terms partially offset by
low-single-digit price declines;
?
volumes increased
enterprise products, respectively, primarily driven by the accelerated pace
of data center builds, network capacity expansion and fiber-to-the-home projects;
? Specialty Materials' net sales increased by
driven by strong demand for premium cover materials, strength in the IT market, and demand for semiconductor-related optical glasses; ? Net sales for Environmental Technologies increased$121 million , or 38%,
primarily driven by improving markets and increased
with strong demand for heavy-duty diesel products in
? Net sales for Life Sciences increased by
driven by strong demand across all regions, ongoing recovery in academic and
pharmaceutical research labs, and continued strong demand for bioproduction
products and diagnostic-related consumables; and
? Net sales for "All Other" increased by
consolidation of HSG sales.
Movements in foreign exchange rates positively impacted
Cost of Sales
The types of expenses included in the cost of sales line item are: raw materials
consumption, including direct and indirect materials; salaries, wages and
benefits; depreciation and amortization; production utilities;
production-related purchasing; warehousing (including receiving and inspection);
repairs and maintenance; inter-location inventory transfer costs; production and
warehousing facility property insurance; rent for production facilities; freight
and logistics costs; and other production overhead.
© 2021 Corning Incorporated . All Rights Reserved.
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Table of Contents Gross Margin In the three months endedMarch 31, 2021 , gross margin increased by$595 million , or 106%. Gross margin as a percentage of sales increased by 12 percentage points for the three months endedMarch 31, 2021 . The increase in gross margin was primarily driven by higher sales and cost control measures, as well as the absence of$161 million in charges for restructuring and capacity realignment, when compared to the prior period. This was partially offset by$50 million of increased expense due to elevated freight and logistics costs and global supply chain disruptions. Movements in foreign exchange rates had a favorable impact of$22 million onCorning's consolidated gross margin in the three months endedMarch 31, 2021 , when compared to the same period in 2020.
Selling, General and Administrative Expenses
In the three months endedMarch 31, 2021 , selling, general and administrative expenses increased by$5 million , or 1%, and declined by five percentage points as percentage of sales, when compared to the prior period. Increases in these costs were primarily driven by compensation and benefit expenses and the consolidation of HSG, mostly offset by the absence of$48 million in restructuring, impairment and other charges and credits during the three months endedMarch 31, 2020 . The types of expenses included in the selling, general and administrative expenses line item are: salaries, wages and benefits; stock-based compensation expense; travel; sales commissions; professional fees; and depreciation and amortization, utilities, rent for administrative facilities and restructuring, impairment and other charges and credits.
Research, Development and Engineering Expenses
In the three months endedMarch 31, 2021 , research, development and engineering expenses decreased by$39 million , or 15%, when compared to the same periods last year. Cost containment measures resulted in lower spending in the most recent quarter, along with the absence of a$13 million charge for restructuring, impairment, and other charges and credits when compared to the prior period. As a percentage of sales, these expenses were four percentage points lower when compared to the same period last year.
Translated earnings contract gain, net
Included in the line item translated earnings contract gain, net, is the impact
of foreign currency hedges which hedge translation exposure arising from
movements in the Japanese yen, South Korean won, new
Three months ended Three months ended Change
March 31, 2021 March 31, 2020 2021 vs. 2020
Income Income Income
before Net before Net before Net
(in millions) taxes income taxes income taxes incomeHedges related to translated earnings: Realized (loss) gain, net (1)$ (12 ) $ (9 ) $ 3 $ 3$ (15 ) $ (12 ) Unrealized gain, net (2) 284 218 65 50 219 168 Total translated earnings contract gain, net$ 272 $ 209 $ 68 $ 53$ 204 $ 156
(1) Includes before tax realized losses related to the expiration of option
contracts for the three months ended
and
the consolidated statements of cash flows.
(2) The impact to income was primarily driven by yen-denominated hedges of
translated earnings.
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Table of Contents
Income (Loss) Before Income Taxes
The translation impact of fluctuations in foreign currency exchange rates,
including the impact of hedges realized in the current quarter, did not
materially impact
(Provision) Benefit for Income Taxes
The (provision) benefit for income taxes and the related effective income tax rates are as follows (in millions):
Three months ended
March 31,
2021 2020
(Provision) benefit for income taxes
27.4 % 11.1 %
For the three months ended
For the three months endedMarch 31, 2020 , the effective income tax rate differed from theU.S. statutory rate of 21% primarily due to an adjustment to our permanently reinvested foreign income position, foreign valuation allowances on deferred tax assets, and certain non-deductible expenses for tax purposes.
Refer to Note 5 (Income Taxes) to the consolidated financial statements for additional information.
Net Income (Loss) Attributable to
Net income (loss) and per share data is as follows (in millions, except per
share amounts):
Three months ended
March 31,
2021 2020
Net income (loss) attributable to
$ (96 ) Net income (loss) attributable toCorning Incorporated used in basic earnings (loss) per common share calculation (1)$ 575 $ (120 ) Net income (loss) attributable toCorning Incorporated used in diluted earnings (loss) per common share calculation (1)$ 599 $ (120 ) Basic earnings (loss) per common share$ 0.75 $ (0.16 ) Diluted earnings (loss) per common share$ 0.67
Weighted-average common shares outstanding - basic 766
760
Weighted-average common shares outstanding - diluted 898 760
(1) Refer to Note 6 (Earnings (Loss) per Common Share) to the consolidated
financial statements for additional information.
Comprehensive Income (Loss)
For the three months ended March 31, 2021 , comprehensive income increased by
$669 million when compared to the same period in 2020, primarily due to an
increase in net income and net unrealized gains on designated hedges of $695
million and $72 million , respectively. The increase in comprehensive income was
partially offset by the loss on foreign currency translation adjustments of $98
million , largely driven by the Japanese yen and South Korean won.
Refer to Note 14 (Shareholders' Equity) to the consolidated financial statements for additional information.
© 2021 Corning Incorporated . All Rights Reserved.
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Table of Contents CORE PERFORMANCE MEASURES In managing the Company and assessing financial performance, certain measures provided by the consolidated financial statements are adjusted to exclude specific items to report core performance measures. These items include gains and losses on translated earnings contracts, acquisition-related costs, certain discrete tax items and other tax-related adjustments, restructuring, impairment losses, and other charges and credits, certain litigation-related expenses, pension mark-to-market adjustments and other items which do not reflect on-going operating results of the Company or its equity affiliates.Corning utilizes constant-currency reporting for the Display Technologies, Environmental Technologies, Specialty Materials and Life Sciences segments for the Japanese yen, South Korean won, Chinese yuan, newTaiwan dollar and the euro. The Company believes that the use of constant-currency reporting allows investors to understand the results without the volatility of currency fluctuations and reflects the underlying economics of the translated earnings contracts used to mitigate the impact of changes in currency exchange rates on earnings and cash flows.Corning also believes that reporting core performance measures provides investors greater transparency to the information used by the management team to make financial and operational decisions. Core performance measures are not prepared in accordance with GAAP. We believe investors should consider these non-GAAP measures in evaluating results as they are more indicative of core operating performance and how management evaluates operational results and trends. These measures are not, and should not, be viewed as a substitute for GAAP reporting measures. With respect to the Company's outlook for future periods, it is not possible to provide reconciliations for these non-GAAP measures because the Company does not forecast the movement of foreign currencies against theU.S. dollar, or other items that do not reflect ongoing operations, nor does it forecast items that have not yet occurred or are out of the Company's control. As a result, the Company is unable to provide outlook information on a GAAP basis.
For a reconciliation of non-GAAP performance measures to their most directly comparable GAAP financial measure, please see "Reconciliation of Non-GAAP Measures".
RESULTS OF OPERATIONS - CORE PERFORMANCE MEASURES
Selected highlights from continuing operations, excluding certain items, follow
(in millions):
Three months ended %
March 31, change
2021 2020 21 vs. 20
Core net sales $ 3,263 $ 2,529 29 %Core equity in earnings of affiliated companies $ 8 $
14 (43 )% Core net income$ 402 $ 177 127 % © 2021 Corning Incorporated. All Rights Reserved. 34
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Table of Contents CoreNet Sales
Core net sales are consistent with net sales by reportable segment. Net sales by reportable segment are presented below (in millions):
Three months ended %
March 31, change
2021 2020 21 vs. 20
Display Technologies $ 863 $ 751 15 %
Optical Communications 937 791 18 %
Specialty Materials 451 352 28 %
Environmental Technologies 441 320 38 %
Life Sciences 300 258 16 %
All Other (1) 271 57 375 %
Net sales of reportable segments and All
Other 3,263 2,529 29 %
Impact of foreign currency movements (2) 27 (33 ) *
Cumulative adjustment related to customer
contract (3) (105 ) *
Consolidated net sales $ 3,290 $ 2,391 38 %
(1) The Company obtained a controlling interest in HSG during the third quarter
of 2020 and has consolidated results in "All Other" as of
in the Display Technologies segment.
(3) Amount represents the negative impact of a cumulative adjustment recorded
during the first quarter of 2020 to reduce revenue in the amount of
million. The adjustment was associated with a previously recorded commercial
benefit asset, reflected as a prepayment, to a customer with a long-term
supply agreement that substantially exited its production of LCD panels.
* Not meaningful Core Net Income
In the three months ended
? Display Technologies' net income increased by
by increased volume and cost control, partially offset by price declines;
?
by volume and cost control;
? Specialty Materials' net income increased by
increased demand and volume; and
? Environmental Technologies', Life Sciences' and "All Other" net income
increased by
The increases in core net income, outlined above, included
Included in core net income for the three months endedMarch 31, 2021 and 2020, is net periodic pension expense in the amounts of$1 million and$12 million , respectively. © 2021Corning Incorporated . All Rights Reserved. 35
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Table of Contents
Core Earnings per Common Share
The following table sets forth the computation of core basic and core diluted earnings per common share (in millions, except per share amounts):
Three months ended
March 31,
2021 2020
Core net income attributable to
$ 177 Less: Series A convertible preferred stock dividend 24
24
Core net income available to common stockholders - basic 378
153
Add: Series A convertible preferred stock dividend 24
24
Core net income available to common stockholders - diluted
Weighted-average common shares outstanding - basic 766
760
Effect of dilutive securities: Stock options and other dilutive securities 17
6
Series A convertible preferred stock 115
115
Weighted-average common shares outstanding - diluted 898
881
Core basic earnings per common share$ 0.49 $ 0.20 Core diluted earnings per common share$ 0.45 $ 0.20
Reconciliation of Non-GAAP Measures
Corning utilizes certain financial measures and key performance indicators that are not calculated in accordance with GAAP to assess financial and operating performance. A non-GAAP financial measure is defined as a numerical measure of a company's financial performance that (i) excludes amounts, or is subject to adjustments that have the effect of excluding amounts, that are included in the comparable measure calculated and presented in accordance with GAAP in the consolidated statements of income (loss) or statements of cash flows, or (ii) includes amounts, or is subject to adjustments that have the effect of including amounts, that are excluded from the comparable measure as calculated and presented in accordance with GAAP in the consolidated statements of income (loss) or statements of cash flows. Core net sales, core equity in earnings of affiliated companies and core net income are non-GAAP financial measures utilized by management to analyze financial performance without the impact of items that are driven by general economic conditions and events that do not reflect the underlying fundamentals and trends in the Company's operations. © 2021Corning Incorporated . All Rights Reserved. 36
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Table of Contents
The following tables reconcile the non-GAAP financial measures to their most directly comparable GAAP financial measure (amounts in millions except percentages and per share amounts):
Three months ended March 31, 2021
Income
before Effective
Net Equity income Net tax Per
sales earnings taxes income rate (a) share
As reported - GAAP $ 3,290 $ 8 $ 825 $ 599 27.4 % $ 0.67
Constant-currency adjustment
(1) (27 ) (6 ) 5 0.01
Translation gain on Japanese
yen-denominated debt (2) (118 ) (90 ) (0.10 )
Translated earnings contract
gain (3) (272 ) (209 ) (0.23 )
Acquisition-related costs (4) 47 35 0.04
Discrete tax items and other
tax-related adjustments (5) 37 0.04
Litigation, regulatory and
other legal matters (6) 8 8 0.01
Pension mark-to-market
adjustment (7) 5 4 0.00
Loss on investments (8) 35 27 0.03
Gain on sale of business (9) (14 ) (14 ) (0.02 )
Core performance measures $ 3,263 $ 8 $ 510 $ 402 21.2 % $ 0.45
(a) Based upon statutory tax rates in the specific jurisdiction for each event.
Three months ended March 31, 2020
(Loss)
income
before Effective
Net Equity income Net (loss) tax Per
sales earnings taxes income rate (a) share
As reported - GAAP $ 2,391 $ 14 $ (108 ) $ (96 ) 11.1 % $ (0.16 )
Constant-currency adjustment
(1) 33 19 (22 ) (0.03 )
Translation loss on Japanese
yen-denominated debt (2) 14 11 0.01
Translated earnings contract
gain (3) (58 ) (45 ) (0.06 )
Acquisition-related costs (4) 28 21 0.03
Discrete tax items and other
tax-related adjustments (5) 37 0.05
Restructuring, impairment and
other charges and credits (10) 225 166 0.22
Cumulative adjustment related
to customer contract (11) 105 105 105 0.14
Core performance measures
21.3 % $ 0.20 (a) Based upon statutory tax rates in the specific jurisdiction for each event.
See Part 1, Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations, Results of Operations - Core Performance Measures,
Reconciliation of Non-GAAP Measures, "Items which we exclude from GAAP measures
to report core performance measures" for the descriptions of the footnoted
reconciling items.
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Table of Contents
Items which we exclude from GAAP measures to arrive at core performance measures are as follows:
(1) Constant-currency adjustment: Because a significant portion of segment revenues and
expenses are denominated in currencies other than the
is important to understand the impact on core net income of translating these currencies
into
denominated in Japanese yen, but also impacted by the South Korean won, Chinese yuan, and
new
income are impacted by the euro, Chinese yuan and Japanese yen. Presenting results on a
constant-currency basis mitigates the translation impact and allows management to evaluate
performance period over period, analyze underlying trends in the businesses, and establish
operational goals and forecasts. We establish constant-currency rates based on internally
derived management estimates which are closely aligned with the currencies we have hedged.
Constant-currency rates are as follows:
Currency Japanese yen Korean won Chinese yuan New Taiwan dollar Euro
Rate ¥107 ?1,175 ¥6.7 NT$31 €.81
(2) Translation (gain) loss on Japanese yen-denominated debt: We have excluded the gain or loss
on the translation of the yen-denominated debt to
unrealized gains and losses of the Japanese yen, South Korean won, Chinese yuan, euro and
new
well as the unrealized gains and losses of the British pound-denominated foreign currency
hedges related to translated earnings. (4) Acquisition-related costs: These expenses include intangible amortization, inventory
valuation adjustments and external acquisition-related deal costs. (5) Discrete tax items and other tax-related adjustments: These include discrete period tax
items such as changes of tax reserves and changes in our permanently reinvested foreign
income position. (6) Litigation, regulatory and other legal matters: Includes amounts that reflect developments
in commercial litigation, intellectual property disputes, adjustments to the estimated
liability for environmental-related items and other legal matters. (7) Pension mark-to-market adjustment: Defined benefit pension mark-to-market gains and losses,
which arise from changes in actuarial assumptions and the difference between actual and
expected returns on plan assets and discount rates. (8) Loss on investments: Amount represents the loss recognized due to mark-to-mark adjustments
capturing the change in fair value based on the closing stock market price. (9) Gain on sale of business: Amount represents the gain recognized for the sale of a
business.
(10) Restructuring, impairment and other charges and credits: This amount includes
restructuring, impairment losses and other charges and credits, as well as other expenses,
primarily accelerated depreciation and asset write-offs, which are not related to
continuing operations and are not classified as restructuring expense. (11) Cumulative adjustment related to customer contract: The negative impact of a cumulative
adjustment recorded during the first quarter of 2020 to reduce revenue in the amount of
asset, reflected as a prepayment, to a customer with a long-term supply agreement that
substantially exited its production of LCD panels.
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Table of Contents REPORTABLE SEGMENTS
Reportable segments are as follows:
? Display Technologies - manufactures glass substrates for flat panel liquid
crystal displays and other high-performance display panels.
?
components for the telecommunications industry. ? Specialty Materials - manufactures products that provide more than 150
material formulations for glass, glass ceramics and fluoride crystals to meet
demand for unique customer needs.
? Environmental Technologies - manufactures ceramic substrates and filters for
automotive and diesel applications.
? Life Sciences - manufactures glass and plastic labware, equipment, media,
serum and reagents enabling workflow solutions for drug discovery and bioproduction. All other businesses that do not meet the quantitative threshold for separate reporting have been grouped as "All Other." This group is primarily comprised of the results of the pharmaceutical technologies, auto glass, new product lines, development projects, and certain corporate investments. The Company obtained a controlling interest in HSG during the third quarter of 2020 and has consolidated results in "All Other" as ofSeptember 9, 2020 . Refer to Note 3 (HSG Transactions) to the consolidated financial statements for additional information on this transaction. Financial results for the reportable segments are prepared on a basis consistent with the internal disaggregation of financial information to assist the chief operating decision maker ("CODM") in making internal operating decisions. A significant portion of segment revenues and expenses are denominated in currencies other than theU.S. dollar. Management believes it is important to understand the impact on core net income of translating these currencies intoU.S. dollars. The Company uses constant currency reporting for Display Technologies, Specialty Materials, Environmental Technologies and Life Sciences.Corning excludes the impact of these currencies from segment sales and net income. The adjustment for constant currency is primarily related to the Display Technologies' segment and excludes the impact of the fluctuation of the Japanese yen, South Korean won, Chinese yuan, and newTaiwan dollar. Certain income and expenses are included in the unallocated amounts in the reconciliation of reportable segment net income (loss) to consolidated net income (loss). These include items that are not used by the CODM in evaluating the results of or in allocating resources to the segments and include the following items: the impact of translated earnings contracts; acquisition-related costs; discrete tax items and other tax-related adjustments; certain litigation, regulatory and other legal matters; restructuring, impairment losses and other charges and credits; adjustments relating to acquisitions; and other non-recurring non-operational items. Although these amounts have been excluded from segment results, they are included in reported consolidated results. Earnings of equity affiliates that are closely associated with the reportable segments are included in the respective segment's net income (loss). Certain common expenses among reportable segments have been allocated differently than they would for stand-alone financial information. Segment net income (loss) may not be consistent with measures used by other companies. Display Technologies
The following table provides net sales and net income for the Display Technologies segment (in millions):
Three months ended %
March 31, change
2021 2020 21 vs. 20
Segment net sales $ 863 $ 751 15 %
Segment net income $ 213 $ 152 40 %
Net sales in the Display Technologies segment increased by $112 million in the
three months ended March 31, 2021 , largely due to volume growth in the mid-teens
in percentage terms partially offset by low-single-digit price declines.
Net income in the Display Technologies segment increased by $61 million in the
three months ended March 31, 2021 , primarily driven by increased volume and cost
control, partially offset by price declines.
?
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Table of ContentsOptical Communications
The following table provides net sales and net income for the
Three months ended %
March 31, change
2021 2020 21 vs. 20
Segment net sales $ 937 $ 791 18 %
Segment net income $ 111 $ 29 283 %
Optical Communications' net sales increased $146 million in the three months
ended March 31, 2021 . Net sales of carrier and enterprise products increased by
$97 million and $49 million , respectively, primarily driven by the accelerated
pace of data center builds, network capacity expansion, and fiber-to-the-home
projects.
Net income increased by
Specialty Materials
The following table provides net sales and net income for the Specialty Materials segment (in millions):
Three months ended %
March 31, change
2021 2020 21 vs. 20
Segment net sales $ 451 $ 352 28 %
Segment net income $ 91 $ 51 78 %
Net sales in the Specialty Materials segment increased by $99 million for the
three months ended March 31, 2021 . Strong demand for premium cover materials,
strength in the IT market, and demand for semiconductor-related optical glasses
drove the increase.
Net income increased by
Environmental Technologies
The following table provides net sales and net income for the Environmental Technologies segment (in millions):
Three months ended %
March 31, change
2021 2020 21 vs. 20
Segment net sales $ 441 $ 320 38 %
Segment net income $ 74 $ 35 111 %
Net sales in the Environmental Technologies segment increased by $121 million
for the three months ended March 31, 2021 . Sales of heavy-duty diesel products
grew 44% year-over-year, driven by customers continuing to adopt more advanced
aftertreatment in China and a stronger-than-expected North American heavy-duty
truck market. Automotive sales were up 34% year-over-year as the global auto
market improved and gas particulate filter adoption continued in Europe and
China .
Net income increased by
© 2021 Corning Incorporated . All Rights Reserved.
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Table of Contents Life Sciences
The following table provides net sales and net income for the Life Sciences segment (in millions):
Three months ended %
March 31, change
2021 2020 21 vs. 20
Segment net sales $ 300 $ 258 16 %
Segment net income $ 48 $ 38 26 %
Net sales in the Life Sciences segment increased by
Net income increased by
All Other All other businesses that do not meet the quantitative threshold for separate reporting have been grouped as "All Other." This group is primarily comprised of the results of the pharmaceutical technologies, auto glass, new product lines and development projects, as well as certain corporate investments. The Company obtained a controlling interest in HSG during the third quarter of 2020 and has consolidated results in "All Other" as ofSeptember 9, 2020 . Refer to Note 3 (HSG Transactions) to the consolidated financial statements for additional information on this transaction. The following table provides net sales and net loss for All Other (in millions): Three months ended % March 31, change 2021 2020 21 vs. 20
Segment net sales$ 271 $ 57 375 % Segment net loss$ (24 ) $ (69 ) 65 % Net sales of this segment increased by$214 million for the three months endedMarch 31, 2021 , when compared to the same period in 2020, driven mainly by the consolidation of HSG. Net loss decreased by$45 million driven by the consolidation of HSG and improved profitability in our emerging businesses.
CAPITAL RESOURCES AND LIQUIDITY
Financing and Capital Resources
2021
There was no material debt activity for the first quarter of 2021.
2020 In the first quarter of 2020,Corning established two unsecured variable rate loan facilities for 1,050 million Chinese yuan, equivalent to$150 million , and 749 million Chinese yuan, equivalent to$105 million , each with a maturity of five years. The funds drawn on the loan facilities through the end of the first quarter totaled 1,402 million Chinese yuan, or$200 million . These Chinese yuan-denominated proceeds will not be converted into USD and will be used for capital projects. Payments of principal and interest on the Notes will be in Chinese yuan, or should yuan be unavailable due to circumstances beyondCorning's control, a USD equivalent. These loans are the sole obligations of the subsidiary borrowers and are not guaranteed by any otherCorning entity. © 2021Corning Incorporated . All Rights Reserved. 41
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Table of Contents Share Repurchase Program
On
For the three months ended
In the three months endedMarch 31, 2020 , the Company repurchased 4.1 million shares of common stock on the open market for approximately$105 million , as part of its 2018 Repurchase Program.
Refer to Note 17 (Subsequent Events) to the consolidated financial statements for additional information.
Capital Spending
Capital spending totaled
Cash Flow
Summary of cash flow data (in millions):
Three months ended
March 31,
2021 2020
Net cash provided by operating activities
Net cash provided by operating activities increased by$475 million in the three months endedMarch 31, 2021 , when compared to the same period in the prior year. The change was primarily driven by higher net income and net favorable movements in working capital of$341 million .
Net cash used in investing activities decreased by
Net cash used in financing activities was$96 million higher in the three months endedMarch 31, 2021 , when compared to the same period last year. The increase was primarily driven by lower proceeds of long-term debt, partially offset by the absence of repurchases of common stock, of$200 million and$105 million , respectively.
Defined Benefit Pension Plans
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Key Balance Sheet Data
Balance sheet and working capital measures are provided in the following table
(in millions):
March 31, December 31,
2021 2020
Working capital $ 4,590 $ 4,237
Current ratio 2.3:1 2.1:1
Trade accounts receivable, net of doubtful accounts
2,133 Days sales outstanding 52 57 Inventories, net$ 2,361 $ 2,438 Inventory turns 3.4 3.2 Days payable outstanding (1) 47 44 Long-term debt$ 7,650 $ 7,816 Total debt$ 7,804 $ 7,972 Total debt to total capital 37 % 37 %
(1) Includes trade payables only.
Management Assessment of Liquidity
We ended the first quarter of 2021 with approximately$2.9 billion of cash and cash equivalents. Our cash and cash equivalents are held in various locations throughout the world and are generally unrestricted. We utilize a variety of strategies to ensure that our worldwide cash is available in the locations in which it is needed. AtMarch 31, 2021 , approximately 50% of the consolidated amount was held outside ofthe United States .Corning also has a commercial paper program pursuant to which we may issue short-term, unsecured commercial paper notes up to a maximum aggregate principal amount outstanding at any one time of$1.5 billion . Under this program, the Company may issue the paper from time to time and will use the proceeds for general corporate purposes. As ofMarch 31, 2021 ,Corning had no outstanding commercial paper.
The Company's
Refer to Note 17 (Subsequent Events) to the consolidated financial statements for additional information.
Other Comprehensive reviews of significant customers and their creditworthiness are completed by analyzing their financial strength at least annually, or more frequently for customers where we have identified an increased measure of risk. We closely monitor payments and developments which may signal possible customer credit issues. From time to time, we factor or sell accounts receivable. During the three months endedMarch 31, 2021 , we sold accounts receivable, accelerating collections for the period of$133 million . We currently have not identified any potential material impact on liquidity resulting from customer credit issues. Major sources of funding for 2021 and beyond will be operating cash flow and proceeds from any issuances of debt. We believe we have sufficient liquidity to fund operations, acquisitions, capital expenditures, scheduled debt repayments and dividend payments. ? © 2021Corning Incorporated . All Rights Reserved. 43
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The Revolving Credit Agreement includes affirmative and negative covenants with which we must comply, including a leverage (debt to capital ratio) financial covenant. The required leverage ratio is a maximum of 60%. AtMarch 31, 2021 , the leverage using this measure was approximately 37%. As ofMarch 31, 2021 , we were in compliance and no amounts were outstanding under the Company's Revolving Credit Agreement. The Company's debt instruments contain customary event of default provisions, which allow the lenders the option of accelerating all obligations upon the occurrence of certain events. In addition, some of the debt instruments contain a cross default provision, whereby an uncured default of a specified amount on one debt obligation of the Company, also would be considered a default under the terms of another debt instrument. As ofMarch 31, 2021 , we were in compliance with all such provisions. Other than discussed, management is not aware of any known trends or any known demands, commitments, events or uncertainties that will, or are reasonably likely to, result in insufficient liquidity. There are no known trends, favorable or unfavorable, that would have a material change in the overall cost of liquidity.
Off Balance Sheet Arrangements
There have been no material changes outside the ordinary course of business in off balance sheet arrangements as disclosed in the 2020 Form 10-K under the caption "Off Balance Sheet Arrangements."
Contractual Obligations There have been no material changes outside the ordinary course of business in the contractual obligations disclosed in the 2020 Form 10-K under the caption "Contractual Obligations" other than the transaction disclosed in Note 17 (Subsequent Events) to the consolidated financial statements.
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements requires management to make estimates and assumptions that affect amounts reported therein. The estimates that require management's most difficult, subjective or complex judgments are described in the 2020 Form 10-K and remain unchanged through the first three months of 2021. For certain items, additional details are provided below.
Impairment of Assets Held for Use
We are required to assess the recoverability of the carrying value of long-lived assets when an indicator of impairment has been identified. We review long-lived assets in each quarter in which impairment indicators are present. We must exercise judgment in assessing whether an event of impairment has occurred. Manufacturing equipment includes certain components of production equipment that are constructed of precious metals, primarily platinum and rhodium. These metals are not depreciated because they have very low physical losses and are repeatedly reclaimed and reused in the manufacturing process and have a very long useful life. Precious metals are reviewed for impairment as part of the assessment of long-lived assets. This review considers all the Company's precious metals that are either in place in the production process; in reclamation, fabrication, or refinement in anticipation of re-use; or awaiting use to support increased capacity. Precious metals are acquired to support the manufacturing operations and are not held for trading or other purposes. AtMarch 31, 2021 andDecember 31, 2020 , the carrying value of precious metals was$3.3 billion and$3.4 billion , respectively, and significantly lower than the fair market value. Most of these precious metals are utilized by the Display Technologies and Specialty Materials segments. The potential for impairment exists in the future if negative events significantly decrease the cash flow of these segments. Such events include, but are not limited to, a significant decrease in demand for products or a significant decrease in profitability in these segments. © 2021Corning Incorporated . All Rights Reserved. 44
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Refer to Note 1 (Significant Accounting Policies) to the consolidated financial statements.
ENVIRONMENTCorning has been named by theEnvironmental Protection Agency (the Agency) under the Superfund Act, or by state governments under similar state laws, as a potentially responsible party for 15 active hazardous waste sites. Under the Superfund Act, all parties who may have contributed any waste to a hazardous waste site, identified by the Agency, are jointly and severally liable for the cost of cleanup unless the Agency agrees otherwise. It isCorning's policy to accrue for its estimated liability related to Superfund sites and other environmental liabilities related to property owned byCorning based on expert analysis and continual monitoring by both internal and external consultants. AtMarch 31, 2021 andDecember 31, 2020 ,Corning had accrued approximately$64 million and$68 million , respectively, for the estimated undiscounted liability for environmental cleanup and related litigation. Based upon the information developed to date, management believes that the accrued reserve is a reasonable estimate of the Company's liability and that the risk of an additional loss in an amount materially higher than that accrued is remote. © 2021Corning Incorporated . All Rights Reserved. 45
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Table of Contents FORWARD-LOOKING STATEMENTS The statements in this Quarterly Report on Form 10-Q, in reports subsequently filed byCorning with theSEC on Forms 8-K, and related comments by management that are not historical facts or information and contain words such as "will," "believe," "anticipate," "expect," "intend," "plan," "seek," "see," "would," and "target" and similar expressions are forward-looking statements. Such statements relate to future events that by their nature address matters that are, to different degrees, uncertain. These forward-looking statements relate to, among other things, the Company's future operating performance, the Company's share of new and existing markets, the Company's revenue and earnings growth rates, the Company's ability to innovate and commercialize new products, and the Company's implementation of cost-reduction initiatives and measures to improve pricing, including the optimization of the Company's manufacturing capacity. Although the Company believes that these forward-looking statements are based upon reasonable assumptions regarding, among other things, current estimates and forecasts, general economic conditions, its knowledge of its business, and key performance indicators that impact the Company, actual results could differ materially. The Company does not undertake to update forward-looking statements. Some of the risks, uncertainties and other factors that could cause actual results to differ materially from those expressed in or implied by the forward-looking statements include, but are not limited to:
- the duration and severity of the COVID-19 pandemic, and its ultimate impact
across our businesses on demand, operations and our global supply chains;
- the effects of acquisitions, dispositions and other similar transactions;
- global business, financial, economic and political conditions;
- tariffs and import duties;
- currency fluctuations between the
the Japanese yen, new
- product demand and industry capacity;
- competitive products and pricing;
- availability and costs of critical components and materials;
- new product development and commercialization;
- order activity and demand from major customers;
- the amount and timing of our cash flows and earnings and other conditions,
which may affect our ability to pay our quarterly dividend at the planned level
or to repurchase shares at planned levels;
- possible disruption in commercial activities due to terrorist activity,
cyber-attack, armed conflict, political or financial instability, natural
disasters, or major health concerns;
- loss of intellectual property due to theft, cyber-attack, or disruption to our
information technology infrastructure;
- unanticipated disruption to equipment, facilities, IT systems or operations;
- effect of regulatory and legal developments;
- ability to pace capital spending to anticipated levels of customer demand;
- rate of technology change;
- ability to enforce patents and protect intellectual property and trade secrets;
- adverse litigation;
- product and components performance issues;
- retention of key personnel;
- customer ability, most notably in the Display Technologies segment, to maintain
profitable operations and obtain financing to fund ongoing operations and
manufacturing expansions and pay receivables when due;
- loss of significant customers;
- changes in tax laws and regulations;
- the impacts of audits by taxing authorities;
- the potential impact of legislation, government regulations, and other
government action and investigations; and
- other risks detailed in
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